EUR/USD doesn't profit from strong PMI

Yesterday, the EMU and US data still failed to give EUR/USD trading a clear direction. The preliminary EMU PMI unexpectedly improved sharply. EUR/USD returned to the 1.3485 area, but the topside in the cross rate was blocked. Later in the session, the dollar even regained slightly ground after lower than expected US jobless claims. At the end of the day, EUR/USD printed unchanged at 1.3464. USD/JPY profited marginally from higher core bond yields and from a rebound in European equities. The pair filled bids in the 101.85 area and is gradually moving away from the low 101.00 area.

This morning, Asian equities show again a mixed picture, with China and Japan slightly outperforming. Japanese inflation was very close to expectations (3.6% Y/Y for the headline national CPI). USD/JPY is still near yesterday’s top. EUR/USD is hardly changed in the 1.3465/70 area.

Today, the eco calendar contains again interesting releases, both in Europe and in the US. In Europe we are keen the seen the outcome of the IFO survey in the wake of yesterday’s PMI data. The overall PMI was ok, but the German manufacturing sector lagged the overall performance. A decent/slightly better than expected IFO report is possible, but we doubt that it will be strong enough to trigger a sustained rebound of the euro. Later this morning, the EMU M3 figure will also be published, but likely without lasting impact on the euro. In the US, the durable orders are expected to rebound (0.5% M/M) from a poor May figure. Both for the IFO and the Durables, we look out for the reaction on the interest rate markets. Have core bond reached a bottom? If so, this should over time support the dollar. Recently, the bond yield differential between the US and Europe came off the highs, but this may again change in case core bond yields would go higher again due to overall better eco data. For now, this is nothing more than a working hypothesis. The data have to do their job first. Yesterday EUR/USD didn’t profit from the better than expected PMI. Given this reaction, we don’t see a reasons for EUR/USD to break higher today as we have mixed feelings on the IFO and see chances for better than expected durables. A context of rising core bond yields should in the first place support USD/JPY. The dollar could also gain against the euro, but much more gradual.

In a longer term perspective, the gradual rise of the dollar against the euro will probably stay intact. Earlier this week, EUR/USD dropped below the 1.3503/1.3477 support even as there was no clear trigger. For now, there is no follow-through price action. The move fits our long term view, but we still want a confirmation of the break as the Fed’s soft tone deprived the dollar from extra interest rate support of late. We maintain a sell-on-upticks bias for the EUR/USD cross rate.

Sterling extends correction after poor UK retail sales

Of late, UK eco data were no longer unequivocally better than expected as was mostly the case earlier this year. The June UK retail sales confirmed this pattern. Sales grew a very meagre 0.1% M/M after a substantial decline in May. On Wednesday, EUR/GBP rebounded as the BoE minutes didn’t give any hints on the BoE policy intentions in the near future. This rebound was extended after yesterday’s disappointing UK retail sales. EUR/GBP filled offers just below 0.7940. This was not yet a spectacular move, especially not as the euro was in better shape after a better than expected EMU PMI. Even so, the price action suggests that the downside in EUR/GBP is becoming a bit more difficult short-term. The recent rally of sterling is ripe for some consolidation. The correction in cable was even more significant than was the case for EUR/GBP as the dollar held quite strong across the board. The pair dropped below the 1.70 barrier.

Today, sterling traders will get a last piece of important information with the first estimate of the UK Q2 GDP. The UK economy is expected to keep the same growth pace from the first quarter at 0.8% Q/Q. We see risks for a figure slightly below consensus. If so, such an outcome could reinforce a short-term positioning/correction out of sterling. Especially the technical picture in cable is showing some cracks. For EUR/GBP, we don’t expect a big leap higher, but the day-to-day momentum is turning less positive on sterling.

Recently, EUR/GBP stayed near the cycle lows and it even set a minor new low earlier this week. The UK news has been a bit more mixed recently and while the damage on sterling was still rather contained, we remain cautious short term. Following the recent gains, we fear sterling needs some more consolidation. Overall euro weakness may hamper a substantial rebound of sterling against the euro. So, there is no reason to go against the trend. We maintain our LT bullish view on sterling with EUR/GBP 0.7755 as a target. However, to set-up new long sterling positions we maintain a sell-on-upticks tactic for EUR/GBP.